Article in The Albuquerque Tribune: Constructing a plan for construction materials

Peter Espinosa, principal of Kirtland Elementary School, knows what having the best facilities possible means to students.

“What it says to kids is we really value you, we value your education and we have high expectations for you,” he says. “We’re inviting you to this wonderful environment because we care about you. It gives teachers better tools to do their job.”

He expected his students to have just that with four new kindergarten classrooms scheduled to open in late 2006.

But he says rising construction costs pushed the project roughly a third of a million dollars over its $1 million budget. Now the classrooms are slated to begin construction next year – the beginning of a new budget cycle – and be open for students in 2007.

“I wish we had started five years ago doing this project because I’m sure the cost per square foot of construction then was significantly cheaper than it is today,” he says. “The cost has just skyrocketed.”

Karen Alarid, director of facilities design and construction for Albuquerque Public Schools, says it’s the only project that’s been delayed due to cost since she took office, but pressure on other projects is mounting.

“The biggest impact is with projects from the old master plan, which was the 2000-2005 master plan,” she says. “We have some projects that aren’t quite finished out there and we’re seeing significant increases due to just cost of building materials. We’re having to get creative in the way that we accommodate those shortfalls.”

Some materials’ prices have risen 20 percent in the past year, and the overall impact of rising materials costs the past 18 months has been a 25 percent to 35 percent increase in the cost of a project, builders say.

With numbers like that, some in the construction industry are getting creative.

Take the 26 custom home builders in Albuquerque who formed a cooperative in early 2005 – known as CB New Mexico LLC – to purchases materials in large quantities to bring down the price.

Strength in numbers

“The vendors see us as a larger volume buyer,” says Bill Reynolds, chairman of the Board of Managers for CB New Mexico. “It’s a really mutual and beneficial type of program. It’s not just the volume, it’s the quality of customer they get.”

Members of the co-op have seen a 1 percent to 10 percent trim off the costs of some construction materials, such as lumber and windows, he says. With the group collectively selling $80 million to $90 million worth of homes a year, that can add up.

But Reynolds, a custom builder and owner of New Haven Homes, says the co-op’s value goes beyond dollars and cents.

“It creates better value and any time you can create more value for your client, you make yourself better, you’re a better builder,” he says. “This is a way to enhance our value to our clients in a lot of different ways.”

Ten vendors have agreements with the co-op, and he’s hoping to have 15 to 20 by the end of the year. Builders in other New Mexico cities show interest in joining, he says, and the co-op could expand.

Flexible contracts

But sometimes dropping a price isn’t enough.

Wildly fluctuating costs can mean a dramatic rise in material costs between the time an agreement is made upon the price for a home and ordering the supplies to build it.

That can leave builders struggling to cover their costs, says Dan Keough, chairman of the Custom Builders Council, part of the Home Builders Association of Central New Mexico.

One answer, Keough says, is this: more flexible contracts that can account for price shifts that were once looked for on a yearly basis, but are now seen monthly.

“We’re going to see price increases as a regular part of business,” he says. “A lot of us are talking about now having a variable final price and discussing some of the commodities that could influence the price typically upward.”

Yet home buyers seem unfazed by the rising costs, Reynolds says.

“There’s quite a demand out there,” he says. “We’ve got all the work we can handle.”

A new paradigm

“I want to change the paradigm of custom building,” says Lee Odess, vice president and general manager of Custom Builders – USA, a management company based in northern Virginia that set up and manages the vendor agreements for Albuquerque’s co-op. “That is our vision and our goal and we’re moving in the right direction.”

Here’s Odess’ version of the old paradigm of custom-home building: Each and every builder has his or her way of working with vendors. They buy in small quantities. It means a lot of work for those selling the materials. Forget about leveraging purchasing power.

“The custom home building market is so fragmented,” he says. “Everybody has their own systems.”

Here’s Odess’ new paradigm: a streamlined, standard way for vendors to work with a collection of home builders. Large quantity materials sales mean price and service deals for the buyers. And eventually, if Custom Builders – USA expands according to plan, builders will have more time to focus on building, because CBUSA will handle back-office duties.

“We will be that operations engine for them,” Odess says.

He sees such cooperation as nonoptional if custom home builders want to survive and thrive in a time when he says large-volume home builders – Pulte Homes and Centex Homes, for example – construct 30 percent to 40 percent of new homes in the United States, up from 10 percent 10 years ago.

“How are they (custom home builders) going to compete?” he says. “Unless they collectively come together and purchase, there’s no way they’re going to be able to do that long term. There’s strength in numbers.”

So far it’s been launched or will soon be launched in eight other U.S. cities in addition to Albuquerque. The company plans to be in 23 cities by the end of next year.

“They (custom home builders) finally got over . . . looking at each other as competition,” he says. “They looked at competition being the larger builders.”

He says the average co-op has about 30 members, and savings hover around 10 percent, depending on what phase of construction the project is in. He’s seen 13 percent savings in the cost of lumber. He says cuts like that have shown $2,000 to $5,000 drops in the construction cost of a house with an average size of 7,000 square feet and average selling price of $700,000.

Of the nine cities it’s in, members of the co-ops in seven of them represent $1.1 billion in home sale revenue for 2004, Odess says.

That economic might means co-ops can talk with material manufacturers and get promised allotments of materials – a tactic used by large builders that is invaluable when supplies start running short, Odess says.

“You can leverage relationships with having a group of people,” he says. “It just makes business to business relationships a lot easier and cleaner which in turn trickles down to better pricing and what we believe is better service.”

FACTBOX:PRICE PRESSURES

So what’s making some construction materials so expensive? Michael Carliner, economist with the National Association of Home Builders, cites a few factors:

Hurricanes in the Gulf: Petroleum – used in construction materials such as asphalt and PVC pipe – has seen its supply squeezed after the destruction along the coast. Reconstruction efforts in the region could strain supplies for many construction materials, thus driving up prices more.

China: The country’s ravenous consumption of steel has driven up the commodity’s price. “That Chinese influence is the single biggest factor that’s changed it,” Carliner says.

Supply and demand: U.S. cement consumption exceeds how much the country produces and about one-quarter of the material is being imported, Carliner says. Thailand’s cement production got hit by the tsunami. High tariffs on Mexican cement discourage selling more of it to the United States. To boot, China’s heavy use of worldwide shipping resources to get its steel is driving up the transportation cost of cement.

FACTBOX:LOOKING AHEAD

Hurricanes, supply-straining consumption by quickly growing countries such as China and India, rising fuel prices and unabated U.S. construction have all pushed upward the cost of construction materials.

Here’s a look at what percentage increases or decreases in cost might be coming for 2006: